Life insurance companies in the US face exposure risks if interest rates spike said the Federal Reserve, as rampant inflation beckons calls to raise rates further. This warning comes after the world’s most eminent central bank raised its benchmark interest rate half a percentage point two weeks ago, the largest hike since 2000.
The debate centres around how life insurers such as Northwestern Mutual (US:NWE) or New York Life will fare if customers decide to cash in on higher interest rates by surrendering contracts en-masse. US life insurance holders can get a cash payout for exciting their policy, which can also be done to avoid the cost of maintaining the insurance.
A particular area of concern for the central bank was how life insurers would fare if further rises in interest rates caused policyholders to surrender their contracts at higher-than-expected rates. “If the increase of surrenders is substantial enough, it could put downward pressure on life insurers' financial performance,” the Federal Reserve said.